Response sent by email
Peter Brower
Department of Trade and Industry
Company Law and Investigations Directorate (Room 507)
1 Victoria Street
London SWIH 0ET
Tel: 0207 215 0224
Fax: 0207 215 0234
3 December, 2001
Dear Peter
DTI consultative document entitled Treasury Shares dated September, 2001
Please find attached the response of The Association of Corporate Treasurers (ACT) to the questions listed in Annex of the above consultative document. Our response does not include a review of Annexes C and D.
We hope that you find our comments useful and thank you for having given us the opportunity to comment on this subject. If you wish to discuss further any of the issues raised in our response please contact our technical team on 0207 213 0738 or by email.
Yours sincerely
Jon Boyle
Chairman of Technical Committee
ACT responses to the questions raised in Annex A of the Consultative Document
Q1 Have you any comments on the draft Regulatory Impact Assessment (RIA) at Annex E? In particular, what are your estimates of the savings or other benefits (or any costs) that would be expected to result from the proposed regulations? Paragraph 6 of the RIA sets out the comments that were previously received on savings. Comments are also sought on the regulatory impact of the proposed tax treatment. (Paragraph 1.7 of the consultative document.)
A1 We do not have any comments regarding Annex E. However, we would like to mention that an analysis of savings or other benefits by companies does require extensive analysis, and we have not been able to obtain such analysis from our member base. However, we would expect the benefits to be considerable, including the potential to use Treasury Shares as a cost effective tool for active capital management, especially in smaller amounts than would be economically practical using other existing mechanisms
Q2 Do you consider that there is likely to be any demand to finance the purchase of shares for holding in treasury from the proceeds of a fresh issue of shares and, if so, should this option be included in the regulations? If yes, what are your views on the treatment of the proceeds of a sale of any treasury shares financed from the proceeds of a fresh issue of shares and on the additional requirements identified in i) - iii) of paragraph 2.5. Under the draft regulations, a purchase of shares for holding in treasury could be financed only out of distributable profits. Shares, which are purchased for immediate cancellation, could continue to be financed out of the proceeds of a fresh issue of shares. (Paragraph 2.5.)
A2 We believe that this option should be included in the regulations as it will give additional flexibility consistent with treasury stock being a tool of regulating the cost of capital on a running basis. For example treasury shares comprising ordinary shares of a company could be purchased with an issue of preference shares or the purchase of shares temporarily financed out of share premium account (see A5 below) could be refinanced out of the proceeds of a subsequent issue (and/or resale from treasury) of shares. The treatment should be consistent with Q5 (see below).
Q3 What are your views on the proposal that investment companies should be prevented from holding treasury shares? (Paragraph 2.7.)
A3 We believe that investment trusts and other investment companies should be permitted to hold treasury shares subject to the approval of their shareholders.
Q4 What are your views on including a requirement in the regulations that treasury shares may not be included as an asset in the balance sheet? (Paragraph 2.23.)
A4 We agree with your proposal that treasury shares should not be included as an asset in the balance sheet. However, the holding should be clearly identified either on the face of the balance sheet or in the notes to the accounts.
Q5 The draft regulations provide that the consideration received on a sale of treasury shares shall be treated as a profit (although the regulations do not specify whether such profit would be realised or unrealised or a combination of both). What are your views on the regulations providing instead that only the proceeds from a sale of treasury shares up to the amount charged on purchase would be realised, with any excess (profit) being unrealised? Should any unrealised profit be required to be transferred to a designated reserve such as the Share Premium Account? (Paragraph 3.1.)
A5 We would propose that treasury shares should not be included as an asset in the balance sheet, but be presented as a deduction from equity, and that any gain or loss arising from the buy-in and re-issue of treasury shares should be presented as a change in equity. We would propose the use of a designated account such as the Share Premium Account. We would also propose that this point is addressed in conjunction with current ASB and IASB initiatives with respect to the accounting treatment of employee share schemes, share options or share awards, and the issuance of options by the company to buy in or re-issue treasury shares, in order to ensure consistency. For example, if 20 shares of £1 each are bought into treasury for £5 each and subsequently re-issued for £7. At the buy back of the shares: Dr Share Capital £20; Dr Share Premium £60; Dr Capital Redemption Reserve £20; Cr Cash £100. Then at the re-issue of the shares: Cr Share Capital £20; Cr Share Premium £60; Cr Capital Redemption Reserve £20; Dr Cash £140; Cr Profit £40 The surplus of £40 on re-issue should be treated as realised profit possibly in a separate performance statement. However, this profit should not be distributable as it reflects the extra value (over the par value) that the market puts on these shares, and therefore the extra value should remain locked in the company rather than being able to be distributed.
Q6 What are your views on the proposed requirements concerning the recording of treasury shares in companies' own registers? (Paragraph 3.2.)
A6 We agree with your proposal that holdings of treasury shares must be reflected in the company's own register of members
Q7 What are your views on the proposed modifications to section 169 notices for companies notifying Companies House of purchases of their own shares, the holding of such shares in treasury and their subsequent sale or cancellation? (Paragraphs 3.3 - 3.6.)
A7 We agree with your proposal
Q8 Do you have any comments on the proposed treatment of bonus shares? (Paragraphs 3.7 - 3.9.)
A8 We agree with your proposal
Q9 What are your views on the proposed changes to the compulsory purchase provisions in Part XIIIA of the 1985 Act in respect of take-overs? (Paragraphs 3.10 - 3.11.)
A9 We have no specific views on the proposed changes
Q10 Do you have any comments on whether or not it should be permitted for companies' treasury shares to be held by nominees? (Paragraphs 4.1 - 4.2.)
A10 We would propose that is should not be permitted for companies' treasury shares to be held by nominees as treasury shares should be easily identified as such and there might be a loss of transparency if held through nominees.
Q11 Do you have any comments on the fact that, because a company holding treasury shares will be regarded as a member of itself, the regulations include no references to the transfer of title to treasury shares? (Paragraphs 4.3 - 4.5.)
A11 Presumably the regulations will allow for the company to transfer treasury shares to purchasers on their resale. Since the shares will continue to exist while in treasury - even though not treated as an asset for accounting purposes - they must surely be transferred rather than being treated for company law purposes as issued?
Q12 What are your views on including a provision prohibiting treasury shares being sold at a discount to their nominal, or par, value? (Paragraph 4.6.)
A12 We agree with your proposal
Q13 Do you have any comments on the proposal that sales of treasury shares should not be restricted to sales for cash? (Paragraph 4.7.)
A13 We agree with your proposal
Q14 Do you have any comments on whether it should be prohibited to hold redeemable shares in treasury? It would not be permitted to hold redeemable shares in treasury past their date of redemption. (Paragraph 4.8.)
A14 We agree with your proposal, although in practice we would expect to see less use of redeemable shares as treasury stock since treasury stock should be used as a tool to manage the cost of capital.
Q15 Do you consider that companies should be entitled to grant a charge, either fixed or floating, over treasury shares or should this be prohibited? Alternatively, in the absence of a prohibition, should a requirement be introduced for a company to offer to sell its treasury shares to shareholders before a charge could be granted? (Paragraphs 4.9 - 4.11.)
A15 We propose that there is a prohibition against a charge being granted over treasury shares and that floating (or other) charges which by their terms would extend to treasury shares be deemed not to do so. Such shares should be deemed not to form part of the company's property for the purposes of s.29(2)(a) of the Insolvency Act 1986.
Q16 Do you agree with the Department' s analysis that no amendments to Part VI of the 1985 Act dealing with disclosure of interest in shares need to be made? (Paragraph 4.12.)
A16 We agree with your proposal
Q17 Do you agree with the Department' s analysis that no amendments to Part XIII of the 1985 Act dealing with arrangements and reconstructions need to be made? (Paragraphs 4.13 - 4.15.)
A17 We agree with your proposal
Q18 Do you have any comments on treasury shares being used for employee share schemes or being held in order to satisfy share options or share awards? In particular, do you consider that any provisions need to be introduced or restrictions lifted to facilitate the use of treasury shares in this way? (Paragraphs 4.16 - 4.17)
A18 We would propose that companies should be able to hold shares in treasury as part of an employee share scheme. However the accounting treatment must be consistent whatever the use of the shares (see comment A5)
Q19 Do you agree with the Department' s analysis that no amendments to section 364A of the 1985 Act dealing with the annual return filed at Companies House need to be made? (Paragraph 4.18)
A19 We agree with your proposal
Q20 Do you have any comments on any of the minor proposed consequential changes to company law dealing with: - i) alteration of a company' s objects (paragraph 5.1); ii) minimum membership for carrying on business (paragraph 5.2); iii) variation of class rights (paragraphs 5.3 - 5.6); iv) merger relief and merger accounting (paragraphs 5.7 - 5.8); v) capital redemption reserve (paragraph 5.9); vi) definition of connected persons etc (paragraph 5.10); vii) investigation of a company (paragraph 5.11); viii) index of defined expressions (paragraph 5.12); ix) form and content of company accounts (paragraph 5.13); x) form and content of group accounts (paragraph 5.14).
A20 We have no comments on the proposals
Q21 Do you have any comments on any other company law issue raised in the consultative document? Do you have any comments on any company law issue not covered in the consultative document? Do you have any comments on the draft regulations?
A21 We have no comments on the proposals
Q22 Do you have any comments on whether the current tax treatment of share repurchases should be extended to purchases without cancellation or on any practical issues which need to be considered? (Paragraphs 7 - 9 of Annex D.)
A22 As far as a vendor of shares is concerned, we consider that the tax treatment should be the same irrespective of whether or not the shares are cancelled. We concur with the reasoning in paragraph 7 of annex D.
Q23 Do you have any views on the proposal that treasury shares should be excluded from issued share capital for tax purposes, and should also be disregarded when applying tests based on a percentage of issued share capital? (Paragraphs 10 - 11 of Annex D.)
A23 We agree with this proposed treatment
Q24 Do you have any views on the proposed tax treatment of shares sold from treasury under which a sale of shares held in treasury after a purchase would not give rise to a capital gain or loss in the hands of the company selling the shares, and a sale of shares by a company from treasury would be regarded as an issue of shares for the purposes of reliefs such as capital gains rollover relief on a take-over? (Paragraphs 12 - 15 of Annex D.)
A24 We agree with these views and hope that it will be clearly stated that the sale of shares held in treasury does not give rise to a capital gain or loss. We consider that, as a company does not own its treasury shares beneficially, sales from treasury should be "issues" of shares, not only for the rollover reliefs mentioned but also for any CGT entrepreneur reliefs which depend on the issue of or subscription for shares (e.g. s289 ICTA and EIS relief). There should also be clear rules as to when such issues/subscriptions are made.
Q25 Do you have any comments on the proposed Stamp Duty treatment under which a purchase of shares without cancellation would be treated in the same way as a purchase followed by cancellation, and a sale from treasury would be treated like a new issue? (Paragraphs 16 - 17 of Annex D.)
A25 We agree with this proposed treatment